Odomirok - Schedule F Flashcards
What are the parts of Schedule F?
6 Parts
- Part 1 Assumed Reinsurance
- Part 2 Premium Portfolio Reinsurance
- Part 3 Ceded Reinsurance (authorized, unauthorized, certfied)
- Part 4 List of Conforming Banks (Collateral) for Part 3
- Part 5 Interrogatories for Schedule F, Part 3
- Part 6 restatement of balance sheet (to identify net credit for reinsurance)
What information is shown on Schedule F, Part 1?
- Assumed Reinsurance
- Premiums, losses, commissions, collateral
Enables understanding of risks assumed as of the current year
What are the categories shown on Schedule F, Part 1?
- affiliated insurers
- U.S. intercompany pooling
- U.S. non-pool
- other (non U.S.)
- other U.S. unaffiliated insurers
- pools & associations
- mandatory pools
- voluntary pools
- other non-U.S. insurers
What information is shown on Schedule F, Part 4?
Provides a listing of the issuing or confirming banks for letters of credit as collateral reported in Schedule F, Part 3, column 22.
Confirming banks make payments in event original issuing bank does not
What are the forms of security a ceding insurer may require from reinsurers as collateral?
- Funds Held
- A portion of the premium due to the reinsurer is WITHHELD by ceding company to pay claims
- For a reinsurer this is a balance sheet ASSET
- For ceding company this is a balance sheet LIABILITY
- Letter of Credit
- A credit issued by a bank in favor of reinsured IN CASE reinsurer cannot meet obligations
Letters of Credit are shown on Part 4
What is the information shown of Schedule F, Part 3?
- The first 20 columns detail the ceded reinsurance balances
- Columns 21- 36 calculate credit risk charge on ceded reinsurance
- Columns 37 - 53 provide the aging of ceded reinsurance
- Columns 54 - 69 provide the calculation of the Provision for Reinsurance for Certified Reinsurance
- Columns 70 - 78 provide the Total Provision for Reinsurance (authorized, unauthorized and total)
What information is shown on Schedule F, Part 5?
- Part 5 has 2 tables with interrogatories for Part 3
Table 1
* identifies 5 largest reinsurer commission rates (where ceded premium ≥ $50,000)
* used to identify companies using reinsurance to conceal high operating leverage
Table 2
* identifies 5 largest loss recoverables from (Col 15) and whether the reinsurer is affiliated with the reporting entity
* to assess concentration of insurance risk
How does Schedule F correspond to the Balance Sheet?
6 items: 1 Asset, 5 Liabilities
Assets
* Line 16.1: amounts recoverable from reinsurers (from Schedule F, Part 3 Cols 7-8, 43)
Liabilities
* line 2: reinsurance payable on paid losses and loss adjustment expenses (from Schedule F, Part 1 Col 6)
* line 9: unearned premiums for ceded reinsurance (from Schedule F, Part 3 Col 13)
* line 12: ceded reinsurance premiums payable net of ceding commissions (from Schedule F, Part 3 Col 17)
* line 13: funds held by company under reinsurance treaties (from Schedule F, Part 3 Col 20)
* line 16: provision for reinsurance (from Schedule F, Part 3 Col 78)
What are the forms of security a ceding insurer may require from reinsurers as collateral?
- Funds Held
- A portion of the premium due to the reinsurer is WITHHELD by ceding company to pay claims
- For a reinsurer this is a balance sheet ASSET
- For ceding company this is a balance sheet LIABILITY
- Letter of Credit
- A credit issued by a bank in favor of reinsured IN CASE reinsurer cannot meet obligations
Why are “Amount of assets pledged or collateral held in trust” not considered an offset when calculating reinsurance provision?
These assets or collateral amounts are
under the control of the reinsurer
the insurer has no control over them
What is the purpose of collateral for reinsurance?
The purpose of both Funds Held and Letter of Credit is to reduce credit risk if reinsurer does not pay claims
What is portfolio insurance and why is it done?
It is the transfer of policies in force or liabilities remaining on a block of insurer’s business
- To Discontinue a line of business
- Remove risk for these liabilities from their books of business
- Surplus relief (in form of discounted premium)
What are the special codes used for in Schedule F, Part 3?
To identify reinsurance relationships of heightened importance to regulators
- Special Code “2” - Cessions of 75% or more of subject premium (identifying potential fronting arrangements to avoid reg oversight)
- Special Code “3” – Counterparty Reporting Exception for Asbestos and Pollution Contracts
- Special Code “4” – Incurred but not Reported Losses on Contracts in Force Prior to July 1, 1984
- Exempt from Unauthorized reinsurance provison
Intercompany cessations are exempt from special code 2
What is a fronting carrier arrangement?
- It is when an insurer cedes a large portion of its business (>75%), so that the reinsurer can avoid regulatory oversight
- Likely occurs when reinsurer is not authorized to conduct business in ceding company’s jurisdiction
Often occurs with WC due strict licensing requirements.
What are the components of reinsurance recoverable?
Recoverable on Paid
* Columns 7 and 8 provide recoverables on paid losses and LAE. These are an asset on the company’s balance sheet (line 16.1)
Recoverable on Unpaid
* Columns 9 through 12 provide recoverable on unpaid loss and LAE.
* For companies that do not participate in intercompany pooling, these are equal to the amount of ceded reserves that are netted against the gross loss and LAE reserves (Balance Sheet Liability rows 1 plus 3)
Unpaid reconciles to Underwriting and Investment, Part 2A, column 3
How is the Credit Risk Charge on Ceded Reinsurance Calculated
Credit Charge = Charge 1 + Charge 2 where
Charge 1 = Credit Risk Factor for Collateralized Recoverables x Collateralized Recoverables
Charge 2 = Credit Risk Factor for Non-Collateralized Recoverables x NonCollateralized Recoverables
Credit Risk Factors determined by financial strength rating for reinsurer (table)
What are the categories for the aging of reinsurance?
The aging of reinsurance is based on terms and conditions of the contract or the date when recoverables exceed $50K
- Current (column 37)
- 1 to 29 days (column 38)
- 30 to 90 days (column 39)
- 91 to 120 days (column 40)
- Over 120 days (column 41
Amounts above reconcile to the summation of Schedule F Part 3, Cols 7 + 8
Amounts greater than 90 days are important for slow play calculation.
How is the aging of reinsurance determined?
- The terms of the contract that specify when the reinsurer should make payment
- The terms of contract that specify when the insurer needs to notify the reinsurer of claims paid
OR
- The date when the amount recoverable exceeds $50,000 for a particular reinsurer and is entered in the insurance company’s financial accounts as a paid recoverable
If terms not specified or amounts less than $50, then mark current
What are certified reinsurers?
- non-U.S. reinsurers domiciled in a jurisdiction designated by the NAIC as a Qualified Jurisdiction (i.e., Bermuda, France, Switzerland, etc.)
- one that would have been categorized as unauthorized prior to 2012
- one that has attained certification from the reporting entity’s domiciliary state
What is considered when a reinsurer applies for certification?
- Jurisdiction
- Rating from rating agency
- Regulatory History
- Financial Position
- Capital / Surplus
What are the benefits of becoming a certified reinsurer?
- Not penalized as heavily as an unauthorized reinsurer, so lower reinsurance provision
- Can post collateral of less than 100% against recoverables.
What are the 2 parts of the Certified Reinsurer reinsurance provision?
RP64(CD): reinsurance provision for collateral deficiency related to certified reinsurers → appears in (Col 64) of Part 3
RP69(OR): reinsurance provision for overdue reinsurance related to certified reinsurers → appears in (Col 69) of Part 3
For a certfied reinsurer how is the collateral deficiency portion of the reinsurance provisions calculated?
RP64(CD)
- Determine Certified Reinsurer rating and % collateral needed for full credit.
- Collateral Requirement = Net Recoverable (Col19) x % Collateral Needed for Full credit
- Credit for Collateral [Cr63(recov)] = Net Recoverable (Col 19) - (Collateral Provided / Collateral Requirement)
- Reinsurance Provision [RP64(CD)] = Net Recoverable (Col 19) - Credit for Collateral [Cr63(recov)]
For a slow paying certfied reinsurer how is the reinsurance provision for overdue reinsurance calculated?
- Determine the amounts overdue by 90 days or more both in dispute and not in dispute (Pn90 & Pd90)
- Determine Credit for Collateral [Cr63(recov)]
- Determine Amount of unsecured recoverables [F] (ie above collateral) where credit is given (Credit for Collateral - Total Collateral) —->min 0.
- RP69(OR) = min [ 20% x MAX ( Pn90 + Pd90 , F ) , Cr63(recov) ]
Different than authorized reinsurer
Recall that the RP69(OR) can not exceed Cr63(recov)
